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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Tax on Rollover/Conversion Date: 1/18/1999 7:16 PM
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[[I have some money in a former employer's 401k program that I am in the
process of rolling over to a Rollover (Traditional) IRA.]]

Good deal...

[[ My question is, if I
decide to convert this into a Roth, and it gets taxed, does the tax money get
taken out of the amount in the IRA, or do I just owe the taxes come tax time
next year? Thanks!]]

It doesn't automatically come out of the IRA. You would have to make that decision. And if you do make that decision, you'll owe taxes and penalties on the difference.

If you don't have the funds elsewhere to pay the tax on the conversion, it is a strike against you when you consider moving from an IRA to a Roth. Let me give you an example...

Say that you have a $20k IRA (all taxable, let's say). Lets say also that you are in the 28% bracket.

Your conversion will cost you $5,600 in taxes. You decide that you don't have the funds availabe to pay these taxes, so you simply convert $14,400 to your Roth IRA, and remove the other $5,600 to pay the tax.

Not only has your Roth IRA investment base been depleted substantially, but you'll now owe PENALTIES on the $5,600 "early" distribution (assume that you are under age 59 1/2) to the tune of $560 (or 10% of the distribution not converted). So this could be a pretty heavy price to pay.

So you might want to give this a bit more consideration before moving on it. You can also read more about the Roth IRA (and the decision making process) in my series of posts on the Roth IRA in the Taxes FAQ area.

TMF Taxes
Roy

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